Monetary Policy and the House Price Boom across U.S. States

The authors use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight’s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001–04) has been different, however: “Local bubbles” have been important in some states, but overall the increase in house prices is a national phenomenon. The authors then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. The authors find the impact of policy shocks on house prices to be very small.

JEL classification: C11, E58, R31

Key words: housing, monetary policy, Bayesian analysis

The authors thank, without implicating, Bob Eisenbeis, Scott Frame, and Dan Waggoner for helpful conversations and seminar participants at the Atlanta Fed, Bank of England, ECB, and the Federal Reserve Board of Governors for comments. The views expressed in this paper are the authors’ and do not necessarily reflect those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.